The €URO
The €uro - the European Union's single currency
What is the euro?
The euro is the European Union's single currency. It was introduced on 1 January 1999 in eleven of the fifteen Member States of the Union. These eleven had successfully implemented the four convergence criteria set down in the Treaty of the European Union (also called the Maastricht Treaty) in 1992 to bring European economies closer together in the lead-up to the euro.
Member States had to meet the following criteria by May 1998. First, each country had to show a reduction in public spending to no more than 3% of its GDP. Second, national debt had to be kept to below 60% of GDP or be seen to be fast approaching this level. Third, inflation should not exceed by more than 1.5% the rate of the three best performing Member States in terms of price stability in the previous year. Fourth, the country's currency must have remained within the normal fluctuations of the European Monetary System for at least two years previously.
Three countries - the United Kingdom, Denmark and Sweden - did not adopt the euro in 1999, although it is possible they might do so at a later date. Greece adopted the euro in 2000.
In January 1999, the euro was launched onto the world's financial markets, allowing banks and stock exchanges to carry out transactions in euro. However, actual notes and coins came into circulation in January 2002. A six-month transition period will allow both national currencies and the euro to be used in the euro zone. In July 2002, national currencies will be withdrawn, leaving the euro as the euro zone's only legal tender.
The European Central Bank, formally constituted in June 1998 and located in Frankfurt, oversees the management of the euro. Its chief concern is the promotion of price stability throughout the euro zone through a single monetary policy ensuring the same inflation targets and interest rates for all eleven euro zone countries. However, economic policy (such as taxation and government expenditure) remains the responsibility of national governments. The Board of the ECB is made up of the presidents of the national bank of each participating EU Member State.
The conversion rates of the participating national currencies (both against each other and against the euro) were irrevocably fixed on 1 January 1999. Devaluation of currency will not be available to countries as a way of extricating themselves from economic difficulties.
Euro coins and notes
The euro is divided into 100 cents. Both coins and notes were circulated from 1 January 2002. The technical features of the coins - size, weight, and metal content - are identical in all euro zone countries. Production of the 56bn coins began in mid-1998, while the first of the 13bn banknotes were printed in July 1999. Nine billion of the notes replaced the national currencies, while 4bn is held in reserve.
There are seven euro banknotes, in denominations of 5, 10, 20, 50, 100, 200 and 500 euro. The notes are identical on both sides, regardless of the country they are printed in. Each note shows the architectural style of a period in Europe's cultural history, from classical to modern times. The reverse side shows the signature of the European Central Bank President, at present, Wim Duisenberg.
Euro coins number eight in all, in denominations of one and two euro, and 1, 2, 5, 10, 20 and 50 cents. Their design differs from the notes, in that one side has a design common to all euro coins, while the other side has a design that reflects the national identity of each country.
Benefits of the euro to the European Union
The adoption of the euro has had beneficial results for the economies of all Member States, bringing in particular, stability, low interest rates and a zero exchange risk. For business, the euro has cut the cost of doing business and simplified cross-border trade. For the consumer the euro has promoted greater competition and a wider choice of goods and services, stable prices and lower interest rates. For the traveller, the euro has made travelling cheaper and easier by eliminating currency exchange charges.
The benefits of the euro to Australia and New Zealand
Both Australia and New Zealand have a vested interest in developments in the European Union. The EU is Australia's largest economic partner. The EU is New Zealand's second largest economic partner, after Australia.
The 11 Member States of the euro zone now represent:
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290mn inhabitants (cf. 268mn for the US and 126mn for Japan)
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19.4% of world GDP (cf. 19.6% for the US and 7.7% for Japan)
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18.6% of world trade (cf. 16.6% for the US and 8.2% for Japan)
For Australian and New Zealand firms, the increased economic stability in Europe have made it a better trading partner, providing new and easier opportunities for companies wishing to increase their trade exposure to Europe. Subsidiaries of Australian and New Zealand firms operating in Europe have gained the same benefits from the single currency as domestic European companies. Companies operating in more than one euro zone Member State have benefitted from the absence of transaction costs and do not need to take out insurance cover to protect against devaluations.
The combination of the Single Market and the single currency has greatly expanded business opportunities in the EU by both increasing access to the EU market and by simplifiying operating rules and costs. In the next few years, expansion of the EU to include several countries from Central and Eastern Europe will mean a consumer market of over 480mn people. This will again increase trade opportunities for exporters from Australia and New Zealand.
EMU - a long history
The European Council of the Heads of State and Government at The Hague in 1969 made EMU an objective of the European Community, to harmonise the economic and monetary policy of the Community’s Member States for the purpose of introducing a single currency. In 1971, that objective became a Community Programme with the aim of creating EMU by 1981. This project failed, largely because of an unfavourable international economic climate.
In response to the world crisis, the Community attempted a common response to maintain a minimum of stability between the exchange rates of the Member States’ currencies. The inability to stabilise floating exchange rates forced them to look for a more efficient instrument. In 1979, the European Monetary System was born, with an instrument of reference, the European Currency Unit (ECU).
The project to re-launch EMU was begun in 1988 when a group of experts under the authority of Jacques Delors, the then President of the European Commission was set up. The group’s task was to examine the methods and outline the stages for completing economic and monetary union. The Delors report was approved by the Madrid Council in 1989, which decided to embark on the first phase of EMU in 1990 and to prepare an intergovernmental conference on the topic. The conference led to the decisions of the Maastricht Summit which approved the Treaty on European Union, also known as the Maastricht Treaty. The Treaty set out the economic convergence criteria to be met for EMU participation and the objective of a single currency by 1999 at the latest.
The convergence criteria were as follows: inflation must be held within 1.5% of the three Member States with the lowest rates of inflation in the previous year; a budget deficit of no more than 3% of GDP and government debt below 60% of GDP; no currency devaluation for at least a two-year period and average nominal long-term interest rates to be within two percentage points of the three Member States with the lowest rates. The economic performance of those countries wishing to participate in EMU was monitored from 1993 to 1997 for their ability to comply with these criteria.
The 3 stages of EMU
The EMU Treaty was designed to be carried out in three phases, each with its own importance, specific nature and duration.
First phase (1 July 1990 - December 1993):
- to remove the obstacles to the movement of capital
- to strengthen the co-ordination of national economic policies
- to intensify co-operation between central banks.
Second phase (January 1994 - December 1998):
- the creation of the European Monetary Institute in Frankfurt
- the strengthening of economic policy co-ordination procedures
- the introduction of economic convergence policies (Maastricht Treaty)
- the adoption of the name ‘euro’ for the single currency
- the designation of Member States meeting the convergence criteria
- the creation of a European Central Bank
- the fixing of exchange rates for the participating countries.
Third phase (January 1999 - July 2002):
- the launch of the process for putting the euro into circulation (as bank accounts, and electronic money only)
- the introduction of euro notes and coins for public use (as of 1 January 2002)
- the end of the transition phase; the euro to become the single currency on 1 July 2002.
The advantages of a single currency
Unlike the ECU, which is simply a system of reference, the euro is a real currency. From 1 January 1999, it was possible to open bank accounts in euro and to make electronic transfers and payments. In July 2002, euro notes and coins will replace, once and for all, the national currencies of the Member States participating in EMU.
This is the first time in history that sovereign countries have agreed to give up their national currency to be replaced, not only by a common currency, but also by a Central Bank and a common monetary policy. The adoption of the euro will have beneficial results for the economies of all Member States, bringing in particular:
- stability - a situation of monetary crisis, like the one Europe experienced in early 1990 and led to the realignment of parities of certain currencies within the European Monetary System and the withdrawal of others from the system, could not happen again. Because of its size, the European Central Bank can more easily absorb the shocks of any future disruptions.
- low interest rates - thanks to market confidence fostered by a strong and independent European Central Bank. Low rates, particularly low long-term rates, will promote investment, encourage economic growth and stimulate job creation.
- a zero exchange risk - fixed parity will mean greater transparency of prices for goods and services leading to stronger competition, lower consumer prices and new business and co-operation opportunities for European firms.
The euro - a balancing factor for the world monetary system
The size of its market and its position as the world’s main economic power will make the euro, in the medium term, a world currency of trade, investment and reserve alongside the US dollar.
Countries which have close economic, commercial and financial ties with the European Union will be directly affected by the launch of the euro. These countries are those connected with the European Union through pre-accession agreements (Cyprus, Central and Eastern Europe), association and customs union agreements (Malta, Turkey), partnership agreements (Mediterranean countries) or through specific ties such as the Lomé Convention with the countries of Africa, the Caribbean and the Pacific (ACP). By joining the euro area and using the euro in their commercial dealings and financial transactions, these countries will no longer have to bear exchange risks and the heavy costs of covering those risks.
The 11 Member States to constitute the euro area on 1 January 1999 will represent:
- 290 million inhabitants (cf. 268mn for the US and 126mn for Japan)
- 19.4% of world GDP (cf. 19.6% for the US and 7.7% for Japan)
- 18.6% of world trade (cf. 16.6% for the US and 8.2% for Japan)
The euro will play a part in establishing more balanced global monetary relations. The EU will be able, thanks to the euro, to better assert its existence, identity and unity at international level, and play a greater role in keeping with its true size.
GLOSSARY
European Council - The Heads of State or Governments of the 15 EU member States meet at least once every six months (June and December) to set the broad economic policy guidelines for Member States’ economic performance in the lead-up to the single currency. The President of the Council is one of the Member States Head of State and the Presidency of the European Council rotates every six months.
European Monetary System - Launched in March 1979, the purpose of the EMS was to reduce the monetary instability in the EU. Parities could only be changed by mutual agreement of the participating Member States and the European Commission. The British pound sterling remained outside the EMS.
European Commission - The executive arm of the European Union with the right to propose legislation. The Commission is responsible for monitoring the economic policies of Member States seeking participation in EMU.
European Central Bank - Based in Frankfurt, the ECB will be responsible for monetary policy throughout the euro area and will ensure price stability. The directors of the ECB will include the governors of the central banks of the eleven euro countries. The ECB came into being in June 1998. Its forerunner was the European Monetary Institute.
Treaty on European Union - Also known as the Maastricht Treaty, it was signed in February 1992. The Treaty established the conditions and the timetable for the introduction of the single European currency.
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